If you’re thinking about giving one of your team some equity in your business I’d ask one thing of you. Stop for a minute, take a breath and ask yourself why.
All too often small business owners get wrapped up in the idea of locking in a key team member with equity without really thinking through the consequences. This generally results in one of two outcomes – either the deal never gets over the line and the team member gets fed up and leaves, or the deal does happen but without proper planning and ends in divorce. Both pretty crap outcomes. So, how do you avoid this?
First things first. Before starting conversations about equity with anyone in your team I’d suggest you sit down with a trusted advisor and run through a bunch of questions. Once you’ve answered all of these you will have a much better idea of what next step you should take. This list isn’t exhaustive, but it’s a good start.
What are your long-term plans for the business?
How much of your business are you willing to give away?
Is this team member really so special you have to give up some of your business to get them to stay?
Have you considered other types of incentive scheme?
Should they have to pay for the equity? If so, do you want the cash or does the company get the money?
What should the team member achieve before getting the equity?
Once you’ve done that, you’ll want to find out some info from the team member in question to ensure your goals align. It’s probably wise to have someone independent interview your team member rather than doing it yourself. You’ll want to ask things like:
What are your long-term plans?
Where do you see this business going?
How does this business support your long-term plans?
What do you think you can deliver to support the future of this business?
It’s only once you’ve gathered all of this information you can start to consider the type of offer you’d like to make to your employee. Any less preparation than this leaves you open to plenty of future drama.
Let’s say you and your key team member see eye-to-eye, for example you both agree there’s lots of value to be added, they want to drive it, and you will be ready for sale in 5 years. Okay, great. It’s at this stage that you should probably bring in an experienced advisor (if you didn’t already back at step one) to run you through the different types of scheme available so you can select one that will align most readily with your mutual goals. Outside of commercial advice, you’ll also need tax advice as many of these schemes have tax complications associated with them, and you’ll want legal advice when it comes to drafting the deal documentation.
If all of this sounds like a lot of work, that’s because it is. Well, not really, but it’s not the sort of thing you can knock out in an afternoon and that’s a very good thing. Your business is a big deal and inviting someone in to be an equity partner should also be treated as a big deal. Expect this kind of transaction to take at least three months, maybe more.
If you’d like to speak with someone about (possibly!) issuing equity to a valued team member, why not get in touch? We’ve helped plenty of business owners negotiate these particular waters and we’d love to help you too.